Ninth Circuit rules prediction market contracts are sports betting, creating circuit split with Third Circuit

Summary

• The Ninth Circuit Court of Appeals ruled on Friday that sports-related event contracts are not "swaps," dealing a significant blow to prediction market platforms in their legal battles with state regulators.
• Platforms and the Commodity Futures Trading Commission (CFTC) argue that all event contracts are derivatives regulated at the federal level, while many states contend the offerings constitute gambling.
• The ruling contradicts an April decision by the Third Circuit Court of Appeals, which held that all event contracts are swaps under CFTC jurisdiction, creating a circuit split that likely sets the stage for Supreme Court review.

Court Rejects Injunctive Relief for Kalshi, Crypto.com, and Robinhood

The Ninth Circuit Court of Appeals rejected requests for injunctive relief from prediction market platforms Kalshi and Crypto.com against the Nevada Gaming Control Board. The court concluded that sports-related event contracts are not derivatives regulated by the federal government.

The ruling also denied Robinhood's request for injunctive relief. Robinhood similarly offers event contracts on its trading platform.

The decision prevents the platforms from stopping Nevada from halting their operations, which the state claims are gambling offerings outside the gaming control board's regulatory framework.

The Core Dispute: Swaps vs. Sports Betting

At the heart of the legal battle are sports-related event contracts, which 44 states argue are nothing more than sports betting.

The platforms — along with their federal regulator, the Commodity Futures Trading Commission — maintain that all event contracts, regardless of topic, are swaps. Swaps are a type of derivative under CFTC purview, and the agency asserts it has exclusive jurisdiction to regulate all event contracts.

The CFTC has even sued nine states to defend what it believes is its sole authority to make rules for prediction markets.

However, the Ninth Circuit rejected that argument. "The sports event contracts were not 'swaps' because they were sports bets," the court stated in its opinion against Kalshi.

Circuit Split Paves Way for Supreme Court

Legal experts have widely anticipated that the question of who has the right to regulate sports-related event contracts — state gaming regulators or the CFTC — would eventually reach the Supreme Court.

That outcome now appears very likely, as the Ninth Circuit's decision directly contradicts a ruling from the Third Circuit Court of Appeals in early April. In that case, the Third Circuit ruled that only the CFTC has jurisdiction over sports-related event contracts.

"This is a classic circuit split," said Joshua Mitts, a professor at Columbia Law School. Circuit splits occur when federal appeals courts rule differently on the same legal question. "Ultimately, this is the kind of legal controversy or legal difference of opinion which will make its way to the Supreme Court."

Industry Response

Kalshi, Crypto.com, Robinhood, the CFTC, and the Nevada Attorney General's office did not immediately respond to requests for comment.

Shares of two online sportsbooks rose in response to the ruling:

• DraftKings jumped 7%
• Flutter Entertainment (parent company of FanDuel) was up more than 6%

Both stocks have been pressured over the past year amid concerns that prediction markets could disrupt the sports betting industry. Both companies have rushed to launch their own prediction market exchanges.

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.

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